The advisor community has been watching the progress of the
Improving Access to Retirement Savings Act—otherwise known as SECURE Act 2.0.
As of this writing, there are two different bills, one in the House and one in
the Senate. The House version is out of committee and enjoying bipartisan
approval; It’s not quite as far along in the Senate, but stands a good chance
of approval and making it onto the President’s desk. One thing is clear:
Republicans and Democrats agree that Americans are not on track for retirement.
With SECURE 2.0 looking like it will become law, 401(k)s and
other retirement plans may finally have a chance to recover some lost ground
from traditional pensions having given way to defined contribution plans. Here
I’d like to discuss the new act, and in particular how it’s opening the way to
rethink retirement investment time horizons and reduce the need for members of
underfunded plans to undertake bigger risks as they get closer to their
retirement date. It also plays into my firm’s mission of rethinking the
traditional 60/40 portfolio mix and protecting the American worker from
downside risk.
What Is SECURE 2.0?
First, a bit about the new legislation. The SECURE Act 2.0
offers savings stimuli to employees and employers alike in the form of
automatic enrollment for newly created retirement plans; tax incentives for
small business employers to offer plans to their employees sooner; and a new
national online database of lost retirement accounts.
The two bills currently in Congress have still not quite
married up to the final proposal—but as an example, the House’s version asks
for provisions that would require employers to accelerate their offering of
plan participation to employees.
This constitutes a tangible change that would serve to
stretch the time horizon on an individual’s retirement account—by beginning an
investment program earlier, there are more years to accumulate savings.
The bill also calls for a redefinition of minimum
eligibility requirements, though to my ear, the better term might be ‘maximum
eligibility requirements.’ While the old rule allowed an employer to prohibit
someone from entering their retirement plan if they worked 1,000 hours or less,
the new language may shorten that cap to 500 hours, thus redefining and
expanding who is eligible.
Other encouraging and expansive items in the bill include
provisions for military spouses—a recognition that they often haven’t had a
conduit to invest. The new law would encourage employers to allow people who
aren’t actually their employee to participate in and benefit from an
employer-based plan. For Congress, this a fairly novel thought process, and
they deserve recognition for trying to answer to new societal needs and work
patterns, particularly around the gig economy.
What Was Wrong with SECURE 1.0?
It’s worth asking the question, why a SECURE Act 2.0? What
was wrong with the first one? To my way of seeing it, this update is only
looking to improve on what was begun in SECURE 1.0. There is a sense of
government trying to get out of way, allowing for retirement plans to exist in
more effective and successful forms.
One way we’re seeing this is how required minimum
distributions (RMDs) have been floating up from 70.5 to 72 years old—a
provision of the prior law. Now in this new version, Congress is proposing that
RMDs go up to age 75. This is another sign of extending time horizons so that
people won’t outlive their retirement savings.
Another step in the right direction is the law’s stance on
auto-escalation: the House proposal asks for an auto-enrollment figure which is
then to escalate by 1 percent every year until it hits 10 percent. This gives especially small plans incentive
to get employees started saving. We are
creatures of habit—as a people, we hate change, even when it’s good for us.
Auto-enrollment and auto-escalation of deferral rates are two ways the bill is
addressing this in-built aversion.
Behavioral science asserts that if you get people started
contributing regularly and increasing the amount they contribute each year,
most will maintain the habit. Even though, as a consumption-driven society, we
are likely to spend whatever is left, most people quickly realize that they can
live with the remainder after they’ve contributed to their retirement account.
Auto-enrollment and auto-escalation are just two ways they won’t have to think
about it as much.
So in sum, this new version of the SECURE Act is an attempt
by Congress to say not so much what was wrong with the first one—it was a step
in the right direction—as an attempt to continue closing the retirement gap by
empowering investors to compound their money for longer. In addition to the
above mentioned provisions for delaying required minimum distributions, the
bill proposes increasing access to certain investment fund types for a broader
range of employers.
What Does This Mean for Investors?
I promised a look into why SECURE Act 2.0 aligns with my
firm’s need to rethink the traditional 60/40 portfolio mix. I’ll keep it brief
here. The ‘40’ in that mix usually refers to fixed income vehicles, notably
bonds—which globally constitute a larger market than the ‘60’ portion of
equities, or stocks. Bonds have long
been a stable source of long-term investment yield. However, as our economy
recovers from the pandemic with signs of inflation setting in for the first
time in 30 years, there are suddenly problems looming for traditional fixed
income. After seeing too many rational investors who’ve worked hard for their
retirement accounts despair when they see negative numbers—the shock is far greater
than the elation from the positives—my
firm has set out to rethink 60/40. In terms of retirement savings plans, not
only have defined contribution plans left people to figure out their own
investment strategy, but the conservative side of their portfolio is now facing
unprecedented risk.
So this proposed law is an admission, from a bipartisan
Congress and with support from the industry, that the retirement gap is real
and that we have not done enough to address the root reason for our existence
as fund managers—which is the outcome of a dignified retirement for American
workers.
Still, we cannot legislate our way out of the retirement
gap.
We need to dare as an industry to continue to focus on
better-outcome solutions. This means not only advocating for SECURE Act 2.0,
but also being hyper-curious about how we can do better with our investment
funds and as a professional community. The average client—the American retiree
or soon-to-be retiree—doesn’t necessarily want to know how the watch works, they
just want to know that it works and is accurate. If this is important to you as
an investment manager or as an investor, you will need to spend time on it.
Likewise, plan managers should produce investment solutions that work, getting
investors to retirement without sending them on an emotional rollercoaster as
they get closer to, and through retirement.
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